Authors: Chris Cook & Mahmood Khaghani*
Like everyone else, Iranians observed the extraordinary U.S. oil market events of 20th & 21st April 2020 and wondered what on earth was going on, and what it means for Iran’s future as a major oil producer. In Tehran, in October 2008 I recall similar astonishment as the global dollar financial system experienced a meltdown from which Iran was safely insulated.
It has been said that history does not repeat itself, but it does rhyme. Once again, Iran is insulated from market turmoil through US financial and physical oil market sanctions and is ‘on the outside looking in’. Global lockdowns are believed to have cut oil product demand by up to 30m barrels per day and this demand shock is propagating up the supply chain of refineries and oil distribution systems to producers at the well.
Coronavirus has shocked the physical oil market into cardiac arrest. Fragmented and viciously competitive producer members of oil institutions such as OPEC and “OPEC+” have no viable response. The media stories everywhere of a Saudi/Russia “Price War” reminded me of two bald men fighting over a comb, because there is no physical demand other than for strategic reserves even for cheap oil until product oversupply is cleared and shut down refineries re-open.
Of course, this is not the first oil market cardiac arrest. In 2008, oil prices went into free-fall from a clearly manipulated ‘spike’ to $147/bbl in July 2008 all the way to $35/bbl in December and nothing OPEC did could arrest the fall. The reason was that the 2008 shock was not due to any lack of physical demand to refine oil, but rather to the inability of buyers to finance global oil deliveries as the dollar trade finance banking system froze as banks lost trust in each other. In order to understand the current market cardiac arrest and how to revive the patient, I shall outline my perspective of US physical and financial energy strategy since 2008.
Obama: Transition through Gas
The organising principle of US foreign policy has for 100 years been US energy security and independence and President Obama’s smart Transition through Gas energy strategy reflected this. The aim of Transition through Gas was to reduce US reliance on Saudi oil by increasing US oil production and to swing domestic and global energy investment to gas & renewable energy production and energy efficiency (‘Fifth Fuel’).
Obama was a Wall Street president who took an unconventional approach to funding such colossal energy investment. His strategy followed that of Henry Kissinger who convinced the Shah of Iran to agree to a 400% increase in oil prices after the 1973 ‘Oil Shock’ which had the effect of making development of Alaska, US Gulf, and North Sea oil economic. So immediately Obama took office in 2009 he acted to re-inflate, support and hold oil prices above $80/barrel for four years while capping politically sensitive US gasoline prices to avoid putting at risk his 2012 re-election.
This four-year oil boom with prices between $80 & $120/barrel brought a wave of petrodollars from producers flooding into US Federal Reserve Bank (“Fed”) accounts, particularly from Saudi Arabia under an energy security agreement with U.S. made in 1945. To avoid exchange rate problems, the Fed created new petrodollars and swapped them for US Treasury Bills in a neutral asset swap operation termed Quantitative Easing (“QE”). However, the economic myth propagated by the Fed and sustained by uncritical global media was that this neutral financial asset swap could in some magical way act as a “stimulus” for the US economy when the true reason was to quietly accommodate oil producer Petrodollars.
In order for oil producers to support high oil prices, they must be able to fund stocks of excess oil held off the market and be able to access bank finance for the flow of oil payments. In order to achieve this, Wall Street used new investment instruments: firstly ‘passive’ oil funds investing in oil market futures contracts, and secondly, secret Enron-style oil prepay funding.
In this way, Wall Street and North Sea oil producers were able to support the global benchmark price set by ICE Brent/BFOE crude oil contracts, and Saudi Arabia’s BWAVE pricing formula based on it. From 2001 to date the North Sea oil market tail has wagged the global oil market dog.
So the vast inflows of petrodollars during President Obama’s first term in office enabled US banks to fund shale oil & gas and renewable energy projects, while historically high US fuel prices encouraged energy-efficient vehicles. By 2014 the US had transitioned from natural gas deficit to surplus; US shale oil production had increased by some 5m bpd, while fuel consumption had fallen by 2m bpd. Similar trends elsewhere of increasing supply and falling consumption saw structural global oil deficit quietly transform into a surplus.
In late 2011 in Tehran, with oil prices well over $100/bbl, I forecast to general disbelief that when the Fed ended QE, the oil price would collapse to $45/$50 bbl. This is exactly what happened when the US finally turned off the QE dollar hosepipe in 2014 while opening a massive military base in gas-rich Qatar. The US also commenced overtures to Iran bearing in mind both the greatest global gas reserves and immense development opportunities for low-cost oil long coveted by US oil majors.
In late 2014, Saudi Arabia awoke from a petrodollar coma to see their power over the US vanish along with their energy security. As a result, Saudi Arabia redirected oil proceeds to the Euro, where a main aim of European Central Bank policy since inception has been to back Euro currency with no intrinsic value with lending based on objective utility of oil and gas energy. So as with Fed dollar QE, the true reason for Euro QE in March 2015 was not stimulus but was simply to accommodate purchases of € securities.
However, the unexpected election in November 2016 of President Trump changed everything.
Trump and energy dominance
Perhaps the most important of President Trump’s motivations, due to an intense personal animosity, is to erase Obama’s political legacy and in particular his energy strategy. But it was a surprise to many observers that Gary Cohn (ex-Goldman Sachs and a Democrat) as Director of the US Economic Council and Rex Tillerson (ex-Exxon CEO) as US Secretary of State were willing and able to serve the Trump administration
Cohn architected and co-founded in 2001 what became the globally dominant Intercontinental Exchange (ICE) through which Wall Street came to dominate and financialise oil markets, while Tillerson was the most powerful US oil executive by far. Together they devised and implemented the US Energy Dominance strategy which was announced by President Trump on 29th June 2017.
As the name suggests, President Trump’s ‘America First’ doctrine when applied to oil and gas markets aimed to massively increase US production in order to dominate global markets with what officials have termed “Molecules of US Freedom” and so take back control of global oil market pricing via oil & gas exports.
So on 1st July 2017 after 16 years of pricing oil using the ICE BWAVE formula, Saudi Arabia switched to prices generated by the Platts reporting service for cargoes of Brent/BFOE oil. For six months huge passive fund investment poured into global oil futures contracts, thereby re-inflating the price. Three months later at the end of March 2018 and nine months to the day after the strategy commenced, Cohn and Tillerson simultaneously left the Trump administration, leaving the strategy to be rolled out over the next two years.
So for the next 18 months, the Fed steadily reduced its balance sheet by selling Treasury Bills to release dollars. Within six months in September 2018, the ECB ended Euro QE, and Fed Treasury Bill sales continued until September 2019.
U.S. and the oil standard
Whoever was responsible for the Abqaiq attack on Saturday, 14th September 2019, the resulting spike in oil and product prices required massive amounts of dollar funding to cover losses on derivative contracts. So Monday 16th September saw an unprecedented ‘spike’ in the sale and repurchase (“Repo”) of US Treasury Bills through which the Fed supplies dollar liquidity to four major US clearing banks. However, this massive Repo spike was only the beginning: from then on, the programme of exchanging dollars for short term Treasury Bills involving only these four banks which became known as ‘NotQE’ continued at a rapid rate.
Meanwhile, through the second half of 2019, oil prices were otherwise stable in a range between $55 and $60/barrel. The more the price exceeded $60/bbl the more shale producers sold oil forward, which enabled them to borrow from banks to finance drilling. When prices fell below $55/barrel, financial buyers appeared.
As a result, the US petrodollar funding system has quietly been completely reconfigured, as Saudi PetroEuros returned to U.S. to be swapped for short term Treasury Bill petrodollar holdings. Where petrodollars indirectly funded shale oil producers through bank lending, shale oil production will now be funded via the same three-way prepay mechanism used by Enron for a decade to secretly defraud their investors and creditors. The difference now is that where Enron’s third-party funders were two of the Big Four private banks, now it is the Fed itself which is the third party funder.
Meanwhile, the waves of debt advanced to the US shale oil industry are beginning to come due and the Big Four banks are all preparing to foreclose on these debts and take ownership of shale oil assets. These banks plan to use production sharing LLC ‘capital partnerships’ with operating partners while oil majors such as Exxon appear also to be aiming to consolidate distressed shale oil assets using similar funding.
So to cut a long story short, the planned outcome of the US Energy Dominance financial energy strategy, was to support and loosely peg oil prices by controlling the benchmark price around $55 to $60/barrel. By pegging the dollar to an “Oil Standard” in this way prepay funding of US oil reserves has essentially monetised US oil
Enter the dragon
Producers have controlled the oil market for so long they believe this to be their God-given right, forgetting that buyers are also capable of asserting market power. For years China’s energy strategy has been to build and fill enormous oil storage capacity, now in excess of 1.2 billion barrels, while a fleet of new and efficient oil refineries has been built with capacity well in excess of China’s product needs, and aimed at exports.
As Iran is painfully aware, China’s ability to ignore US sanctions means that they have become oil buyer of last resort at distressed prices, and may, therefore, dump cheap oil products into the market with which other refiners cannot compete. China has also discussed cooperation with other major oil buyers, particularly India. Other countries in oil deficit, notably EU nations, also have an incentive to join a cooperative ‘buyer’s club’.
So in my view, China has been preparing for years to assert ‘buy-side’ consumer oil market pricing power and the unprecedented demand shock propagating from China has created the perfect opportunity. When the oil market recovers from this cardiac arrest which broke the US/Saudi oil peg I believe that China can and will assert buy-side market power, probably in loose cooperation with other major consumers who see no reason to continue to transfer up to an additional $30/barrel to producers.
The story of a so-called oil war between Saudi Arabia and Russia aimed at killing off US shale oil production is a myth: the true struggle for market share appears to be an attempt by a US/Saudi Arabia partnership to out-compete Russian oil sales to Europe and elsewhere. Whatever the geopolitical truth of it, the collapse of product demand far in excess of any feasible voluntary oil production cuts makes talk of market share redundant, when there simply is no market to share.
So once enough refineries shut down to allow surplus oil on the market to begin to clear and a physical market price to re-emerge we will see two struggles begin. Firstly the struggle between buyers and sellers, and when, as I expect, the buyers win, the continuing struggle for oil market share between producers.
In my view, the crazy spike in prices of the US WTI oil futures benchmark price to a negative price of $37/bbl represents a historic point of failure from which the contract will not recover. It seems to me there is now an urgent need for a temporary resolution of the broken oil and products markets while a transition to new and sustainable global energy and financial markets get underway.
On the outside looking in
As the great author, Arthur Conan Doyle wrote: “Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth”
Iran now has no options other than to pursue improbable and unorthodox market solutions in order to resolve an impossible economic situation, by a two-stage process of resolution and transition. The resolution step is to re-purpose existing structures and infrastructure with no change in the law. This then provides the basis for proof of concept of smart market and energy fintech innovations which enable transition to sustainable low carbon and low cost physical and financial solutions.
My colleagues and I have long promoted 21st C Iranian physical and financial markets in oil products, but these have always been resisted by vested interests. However, global collapse of product prices has now seen Iranian product prices converge with neighbouring countries, thereby neutralising certain vested interests. Our proposal for an interim resolution of Iran’s economy builds upon existing subsidy and rationing policy and technology for oil products.
Firstly, our innovation is to simply for the government to issue an “Energy Dividend” of vouchers or credits, to Iran’s population, each of which will be accepted in payment for products.
Because the Euro 5 standard for gasoline is used throughout Eurasia, we propose that each “Energy Credit Obligation” (ECO) will be returnable in payment for 1 litre of Euro 5 gasoline. Such standard ECOs will also be accepted by refiners and distributors, in payment for other fuels at a discount or premium to Euro 5 gasoline.
Refineries who issue such ECOs would no longer buy crude oil in exchange for conventional currency such as riyals or dollars since to do so exposes them to the risk of oil price fluctuations. Instead, refiners will enter into production sharing partnership agreements or oil/product swaps with oil suppliers in exchange for a percentage entitlement to the flow of ECOs.
So the ECO represents prepayment backed by the Iranian government and energy complex for the eternal intrinsic use value of energy, and in uncertain times many investors seek such assets. In order to build trust in the ECO, issuance must be transparent to everyone, and I addition must be overseen by professional service providers with a stake in the outcome who manage issuance and redemption of ECOs against use.
The ECO represents a fixed point upon which 21st C smart energy markets and economy may be introduced by Iran’s greatest resource – one of the greatest global pools of intellectual capacity – to collaborate in solving humanity’s greatest challenges.
*Mahmood Khaghani, former director-general of the Caspian Sea and Central Asia Department at Iran’s Ministry of Petroleum. He is now an advisor to IRIEMP- University of Tehran & Education and Research Institute -ICCIMA
From our partner Tehran Times
The hydrogen revolution: A new development model that starts with the sea, the sun and the wind
“Once again in history, energy is becoming the protagonist of a breaking phase in capitalism: a great transformation is taking place, matched by the digital technological revolution”.
The subtitle of the interesting book (“Energia. La grande trasformazione“, Laterza) by Valeria Termini, an economist at the Rome University “Roma Tre”,summarises – in a simple and brilliant way – the phase that will accompany the development of our planet for at least the next three decades,A phase starting from the awareness that technological progress and economic growth can no longer neglect environmental protection.
This awareness is now no longer confined to the ideological debates on the defence of the ecosystem based exclusively on limits, bans and prohibitions, on purely cosmetic measures such as the useless ‘Sundays on which vehicles with emissions that cause pollution are banned’, and on initiatives aimed at curbing development – considered harmful to mankind – under the banner of slogans that are as simple as they are full of damaging economic implications, such as the quest for ‘happy degrowth’.
With “degrowth” there is no happiness nor wellbeing, let alone social justice.
China has understood this and, with a view to remedying the environmental damage caused by three decades of relentless economic growth, it has not decided to take steps backwards in industrial production, by going back to the wooden plough typical of the period before the unfortunate “Great Leap Forward” of 1958, but – in its 14thFive-Year Plan (2020- 2025)-it has outlined a strategic project under the banner of “sustainable growth”, thus committing itself to continuing to build a dynamic development model in harmony with the needs of environmental protection, following the direction already taken with its 13th Five-Year Plan, which has enabled the Asian giant to reduce carbon dioxide emissions by 12% over the last five years. This achievement could make China the first country in the world to reach the targets set in the 2012 Paris Climate Agreement, which envisage achieving ‘zero CO2 emissions’ by the end of 2030.
Also as a result of the economic shock caused by the Covid-19 pandemic, Europe and the United States have decided to follow the path marked out by China which, although perceived and described as a “strategic adversary” of the West, can be considered a fellow traveller in the strategy defined by the economy of the third millennium for “turning green”.
The European Union’s ‘Green Deal’ has become an integral part of the ‘Recovery Plan’ designed to help EU Member States to emerge from the production crisis caused by the pandemic.
A substantial share of resources (47 billion euros in the case of Italy) is in fact allocated destined for the “great transformation” of the new development models, under the banner of research and exploitation of energy resources which, unlike traditional “non-renewable sources”, promote economic and industrial growth with the use of new tools capable of operating in conditions of balance with the ecosystem.
The most important of these tools is undoubtedly Hydrogen.
Hydrogen, as an energy source, has been the dream of generations of scientists because, besides being the originator of the ‘table of elements’, it is the most abundant substance on the planet, if not in the entire universe.
Its great limitation is that in order to be ‘separated’ from the oxygen with which it forms water, procedures requiring high electricity consumption are needed. The said energy has traditionally been supplied by fossil – and hence polluting- fuels.
In fact, in order to produce ‘clean’ hydrogen from water, it must be separated from oxygen by electrolysis, a mechanism that requires a large amount of energy.
The fact of using large quantities of electricity produced with traditional -and hence polluting – systems leads to the paradox that, in order to produce ‘clean’ energy from hydrogen, we keep on polluting the environment with ‘dirty’ emissions from non-renewable sources.
This paradox can be overcome with a small new industrial revolution, i.d. producing energy from the sea, the sun and the wind to power the electrolysis process that produces hydrogen.
The revolutionary strategy based on the use of ‘green’ energy to produce adequate quantities of hydrogen at an acceptable cost can be considered the key to a paradigm shift in production that can bring the world out of the pandemic crisis with positive impacts on the environment and on climate.
In the summer of last year, the European Union had already outlined an investment project worth 470 billion euros, called the “Hydrogen Energy Strategy”, aimed at equipping the EU Member States with devices for hydrogen electrolysis from renewable and clean sources, capable of ensuring the production of one million tonnes of “green” hydrogen (i.e. clean because extracted from water) by the end of 2024.
This is an absolutely sustainable target, considering that the International Energy Agency (IEA) estimates that the “total installed wind, marine and solar capacity is set to overtake natural gas by the end 2023 and coal by the end of 2024”.
A study dated February 17, 2021, carried out by the Hydrogen Council and McKinsey & Company, entitled ‘Hydrogen Insights’, shows that many new hydrogen projects are appearing on the market all over the world, at such a pace that ‘the industry cannot keep up with it’.
According to the study, 345 billion dollars will be invested globally in hydrogen research and production by the end of 2030, to which the billion euros allocated by the European Union in the ‘Hydrogen Strategy’ shall be added.
To understand how the momentum and drive for hydrogen seems to be unstoppable, we can note that the Hydrogen Council, which only four years ago had 18 members, has now grown to 109 members, research centres and companies backed by70 billion dollar of public funding provided by enthusiastic governments.
According to the Executive Director of the Hydrogen Council, Daryl Wilson, “hydrogen energy research already accounts for 20% of the success in our pathway to decarbonisation”.
According to the study mentioned above, all European countries are “betting on hydrogen and are planning to allocate billions of euros under the Next Generation EU Recovery Plan for investment in this sector”:
Spain has already earmarked 1.5 billion euros for national hydrogen production over the next two years, while Portugal plans to invest 186 billion euros of the Recovery Plan in projects related to hydrogen energy production.
Italy will have 47 billion euros available for “ecological transition”, an ambitious goal of which the government has understood the importance by deciding to set up a department with a dedicated portfolio.
Italy is well prepared and equipped on a scientific and productive level to face the challenge of ‘producing clean energy using clean energy’.
Not only are we at the forefront in the production of devices for extracting energy from sea waves – such as the Inertial Sea Waves Energy Converter (ISWEC), created thanks to research by the Turin Polytechnic, which occupies only 150 square metres of sea water and produces large quantities of clean energy, and alone reduces CO2 emissions by 68 tonnes a year, or the so-called Pinguino (Penguin), a device placed at a depth of 50 metres which produces energy without damaging the marine ecosystem – but we also have the inventiveness, culture and courage to accompany the strategy for “turning green”.
The International World Group of Rome and Eldor Corporation Spa, located in the Latium Region, have recently signed an agreement to promote projects for energy generation and the production of hydrogen from sea waves and other renewable energy sources, as part of cooperation between Europe and China under the Road and Belt Initiative.
The project will see Italian companies, starting with Eldor, working in close collaboration with the Chinese “National Ocean Technology Centre”, based in Shenzhen, to set up an international research and development centre in the field of ‘green’ hydrogen production using clean energy.
A process that is part of a global strategy which, with the contribution of Italy, its productive forces and its institutions, can help our country, Europe and the rest of the world to recover from a pandemic crisis that, once resolved, together with digital revolution, can trigger a new industrial revolution based no longer on coal or oil, but on hydrogen, which can be turned from the most widespread element in the universe into the growth engine of a new civilisation.
Jordan, Israel, and Palestine in Quest of Solving the Energy Conundrum
Gas discoveries in the Eastern Mediterranean can help deliver dividends of peace to Jordan, Israel, and Egypt. New energy supply options can strengthen Jordan’s energy security and emergence as a leading transit hub of natural gas from the Eastern Mediterranean. In fact, the transformation of the port of Aqaba into a second regional energy hub would enable Jordan to re-export Israeli and Egyptian gas to Arab and Asian markets.
The possibility of the kingdom to turn into a regional energy distribution centre can bevalid through the direction of Israeli and Egyptian natural gas to Egyptian liquefaction plants and onwards to Jordan, where it could be piped via the Arab Gas Pipeline to Syria, Lebanon, and countries to the East. The creation of an energy hub in Jordan will not only help diversify the region’s energy suppliers and routes. Equal important, it is conducive to Jordan’s energy diversification efforts whose main pillars lie in the import of gas from Israel and Egypt; construction of a dual oil and gas pipeline from Iraq; and a shift towards renewables. In a systematic effort to reduce dependence on oil imports, the kingdom swiftly proceeds with exploration of its domestic fields like the Risha gas field that makes up almost 5% of the national gas consumption. Notably, the state-owned National Petroleum Company discovered in late 2020 promising new quantities in the Risha gas field that lies along Jordan’s eastern border with Iraq.
In addition, gas discoveries in the Eastern Mediterranean can be leveraged to create interdependencies between Israel, Jordan, and Palestine with the use of gas and solar for the generation of energy, which, in turn, can power desalination plants to generate shared drinking water. Eco-Peace Middle East, an organization that brings together environmentalists from Jordan, Israel and Palestine pursues the Water-Energy Nexus Project that examines the technical and economic feasibility of turning Israeli, Palestinian, and potentially Lebanese gas in the short-term, and Jordan’s solar energy in the long-term into desalinated water providing viable solutions to water scarcity in the region. Concurrently, Jordan supplies electricity to the Palestinians as means to enhancing grid connectivity with neighbours and promoting regional stability.
In neighbouring Israel, gas largely replaced diesel and coal-fired electricity generation feeding about 85% of Israeli domestic energy demand. It is estimated that by 2025 all new power plants in Israel will use renewable energy resources for electricity generation. Still, gas will be used to produce methane, ethanol and hydrogen, the fuel of the future that supports transition to clean energy. The coronavirus pandemic inflicted challenges and opportunities upon the gas market in Israel. A prime opportunity is the entry of American energy major Chevron into the Israeli gas sector with the acquisition of American Noble Energy with a deal valued $13 billion that includes Noble’s$8 billion in debt.
The participation of Chevron in Israeli gas fields strengthens its investment portfolio in the Eastern Mediterranean and fortifies the position of Israel as a reliable gas producer in the Arab world. This is reinforced by the fact that the American energy major participates in the exploration of energy assets in Iraqi Kurdistan, the UAE, and the neutral zone between Saudi Arabia and Kuwait. Israel’s normalization agreement with the UAE makes Chevron’s acquisition of Noble Energy less controversial and advances Israel’s geostrategic interests and energy export outreach to markets in Asia via Gulf countries.
The reduction by 50% in Egyptian purchase of gas from Israel is a major challenge caused by the pandemic. Notably, a clause in the Israel-Egypt gas contract allows up to 50% decrease of Egyptian purchase of gas from Israel if Brent Crude prices fall below $50 per barrel. At another level, it seems that Israel should make use of Egypt’s excess liquefaction capacity in the Damietta and Idku plants rather than build an Israeli liquefaction plant at Eilat so that liquefied Israeli gas is shipped through the Arab Gas Pipeline to third markets.
When it comes to the West Bank and Gaza, energy challenges remain high. Palestine has the lowest GDP in the region, but it experiences rapid economic growth, leading to an annual average 3% increase of electricity demand. Around 90% of the total electricity consumption in the Palestinian territories is provided by Israel and the remaining 10% is provided by Jordan and Egypt as well as rooftop solar panels primarily in the West Bank. Palestinian cities can be described as energy islands with limited integration into the national grid due to lack of high-voltage transmission lines that would connect north and south West Bank. Because of this reality, the Palestinian Authority should engage the private sector in energy infrastructure projects like construction of high-voltage transmission and distribution lines that will connect north and south of the West Bank. The private sector can partly finance infrastructure costs in a Public Private Partnership scheme and guarantee smooth project execution.
Fiscal challenges however outweigh infrastructure challenges with most representative the inability of the Palestinian Authority to collect electricity bill payments from customers. The situation forced the Palestinian Authority to introduce subsidies and outstanding payments are owed by Palestinian distribution companies to the Israeli Electricity Corporation which is the largest supplier of electricity. As consequence 6% of the Palestinian budget is dedicated to paying electricity debts and when this does not happen, the amount is deducted from the taxes Israel collects for the Palestinian Authority.
The best option for Palestine to meet electricity demand is the construction of a solar power plant with 300 MW capacity in Area C of the West Bank and another solar power plant with 200 MW capacity across the Gaza-Israel border. In addition, the development of the Gaza marine gas field would funnel gas in the West Bank and Gaza and convert the Gaza power plant to burn gas instead of heavy fuel. The recent signing of a Memorandum of Understanding between the Palestinian Investment Fund, the Egyptian Natural Gas Holding Company (EGAS) and Consolidated Contractors Company (CCC) for the development of the Gaza marine field, the construction of all necessary infrastructure, and the transportation of Palestinian gas to Egypt is a major development. Coordination with Israel can unlock the development of the Palestinian field and pave the way for the resolution of the energy crisis in Gaza and also supply gas to a new power plant in Jenin.
Overall, the creation of an integrating energy economy between Israel, Jordan, Egypt, and Palestine can anchor lasting and mutually beneficial economic interdependencies and deliver dividends of peace. All it takes is efficient leadership that recognizes the high potentials.
The EV Effect: Markets are Betting on the Energy Transition
The International Renewable Energy Agency (IRENA) has calculated that USD 2 trillion in annual investment will be required to achieve the goals of the Paris Agreement in the coming three years.
Electromobility has a major role to play in this regard – IRENA’s transformation pathway estimates that 350 million electric vehicles (EVs) will be needed by 2030, kickstarting developments in the industry and influencing share values as manufacturers, suppliers and investors move to capitalise on the energy transition.
Today, around eight million EVs account for a mere 1% of all vehicles on the world’s roads, but 3.1 million were sold in 2020, representing a 4% market share. While the penetration of EVs in the heavy duty (3.5+ tons) vehicles category is much lower, electric trucks are expected to become more mainstream as manufacturers begin to offer new models to meet increasing demand.
The pace of development in the industry has increased the value of stocks in companies such as Tesla, Nio and BYD, who were among the highest performers in the sector in 2020. Tesla produced half a million cars last year, was valued at USD 670 billion, and produced a price-to-earnings ratio that vastly outstripped the industry average, despite Volkswagen and Renault both selling significantly more electric vehicles (EV) than Tesla in Europe in the last months of 2020.
Nevertheless, it is unlikely this gap will remain as volumes continue to grow, and with EV growth will come increased demand for batteries. The recent success of EV sales has largely been driven by the falling cost of battery packs – which reached 137 USD/kWh in 2020. The sale of more than 35 million vehicles per year will require a ten-fold increase in battery manufacturing capacity from today’s levels, leading to increased shares in battery manufacturers like Samsung SDI and CATL in the past year.
This rising demand has also boosted mining stocks, as about 80 kg of copper is required for a single EV battery. As the energy transition gathers pace, the need for copper will extend beyond electric cars to encompass electric grids and other motors. Copper prices have therefore risen by 30% in recent months to USD 7 800 per tonne, pushing up the share prices of miners such as Freeport-McRoran significantly.
Finally, around 35 million public charging stations will be needed by 2030, as well as ten times more private charging stations, which require an investment in the range of USD 1.2 – 2.4 trillion. This has increased the value of charging companies such as Fastnet and Switchback significantly in recent months.
Skyrocketing stock prices – ahead of actual deployment – testify to market confidence in the energy transition; however, investment opportunities remain scarce. Market expectations are that financing will follow as soon as skills and investment barriers fall. Nevertheless, these must be addressed without delay to attract and accelerate the investment required to deliver on the significant promise of the energy transition.
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